TAX Flashcards
Sources of Federal Tax Law/ Authority
- Internal Revenue code: Primary source of all tax law
- Treasury regulations: great authority but not law
- Revenue rulings and revenue procedures: administrative interpretation may be cited
- Congressional Committee reports: indicate the intent of congress/ may not be cited
- Private Letter rulings: apply to specific taxpayer
- Judicial sources: court decisions interpret
Step Transaction
Ignore the individual transactions and instead tax the ultimate transaction
Example: the XYZ corporation sells property to an unrelated purchaser who subsequently resells the property to a wholly owned subsidiary
Sham Transaction
A transaction that lacks a business purpose and economic substance will be ignored for tax purposes
Example: A sale by XYZ to ABC, but both XYZ and ANC are owned by the same person
Substance over form
The substance of a transaction and not merely its form governs its tax consequences
Example: The president of XYZ has the company loan him money he needs. He never intends to repay the loan or take a salary
Assignment of Income
Income is taxed to the tree that grows the fruit even though it may be assigned to another prior receipt
Example: Mr. Towns XYZ, an S corporation. He directs that all income be paid to his son. Mr. T reports no income
Dates for paying estimated Taxes
- April 15th
- June 15th
- September 15th
- January 15th
Frivolous Return (IRS Penalty)
$5,000
Negligence (IRS Penalty)
Penalty is 20% of the portion of the underpayment attributed to negligence
Civil Fraud (IRS Penalty)
Penalty is 75% of the portion of the tax underpayment attributable
Failure to File (IRS Penalty)
Penalty is 5% of the tax due per month, with a maximum of 25%
Failure to Pay (IRS Penalty)
Penalty is 0.5% per month the tax is unpaid with a maximum of 25%
Federal Withholding Tax Underpayment Penalty
to avoid, pay lesser of:
- 90% of the current year’s tax liability
- 100% of the prior years tax liability (or 110% if the last years adjusted gross income exceeded 150,000)
Adjustments for Adjusted Gross Income (AGI)
The second step in 1040 calculation is AGI. it is total income (or gross income) less adjustments to income. The main adjustments or deductions to income are:
- IRA contributions
- Self Employment tax
- Self Employment health insurance (100%)
- Keogh or SEP
- Alimony paid (pre 2019 divorce)
Schedule A itemized deductions
- Medical, Dental and LTC (7.5% AGI)
- Casualty and theft loss
- Real Estate Taxes*
- Investment interest expense
- Home mortgage interest
- State and Local taxes*
- Personal Property tax*
- Charitable gifts
*Limited to 10,000$/year
Casualty Losses (calculation of the deductible loss)
Must be a federally declared disaster
First: use the lesser of basis or FMV
Second: Subtract any insurance coverage
Third: Subtract $100 (floor)
Fourth: Subtract 10% of AGI
Kiddie Tax
All net UNEARNED income of a child who has NOT attained age 18 or turns 19-23 if a full time student and who has at least one parent alive is taxed at parents rate regardless of the source of assets.
Children under 18 are entitled to a standard deduction amount (1,100) and an additional 1,100 of unearned income will be taxed at the Childs rate (10%)
Self-Employment Income
- Net schedule C income
- General partnership income (K-1 Income)
- Board of Directors Fees
- Part-time earnings (1099)
- NOT wages or K-1 distributions from an S corporation
Self Employment Tax Calculation
The taxable wage base will not exceed $142,800 (2021). If you added up the self employed income and you exceeded 142,800$ you did something wrong.
Why? social security tax stops at 142,800
Shortcut:
Multiply total self-employment income by .1413
Tax Credits
- Credit for child and dependent care expenses
- Child tax credit (up to 1,400/child could be refundable)
- Adoption Credit
- Elderly and disabled credit
- foreign tax credit
- Earned income credit (refundable)
Accounting Methods
Cash: mandatory where taxpayers records reflect only cash transactions and there are no inventories
Accrual: Mandatory for purchases and sales where there are inventories
Hybrid: Combines accrual for inventory portion of business and cash for cash portion of business
Percentage of completion: for long term contracts where contract will not be completed within the taxable year started
Subchapter S corporation (Eligibility)
- the number of shareholders is limited to 100
- the corporation can have only a single class of outstanding common stock (no preferred), but the common stock can be voting or non-voting
- must be a domestic corporation
- Only individuals, estates and certain trusts may be shareholders
Note: nonresident aliens (persons who are neither citizens nor permanent residents of the US) cannot be shareholders
Taxis Basis - Partnership / LLC
- Cash invested
- Direct Loans made to the partnership
- Partnership Debt - loans made to the partnership - not the partner (bank loans)
Note: S corp basis does NOT include bank loans even if the S corp owner personally guarantees the debt.
Property Classes
5 year :Computers, Autos, and Trucks (1245 property)
7 year: Office equipment except computers (1245 property)
27.5 year: Residential rental property (1250 property)
39 year: Non-residential real property (1250 property)
CORN!!
Boot / gain recognized / basis
- No boot received - recognized gain is zero
- when boot is received just answer that the recognized gain is the boot received
- Boot paid is added to basis
- Basis carries over from prior property
Boot / gain recognized / basis
- No boot received - recognized gain is zero
- when boot is received just answer that the recognized gain is the boot received
- Boot paid is added to basis
- Basis carries over from prior property
Capital Gains and Losses
- ST capital gain and ST losses are netted LT capital gains a nd LT capital losses are netter
- If a gain and a loss remain they are again netted
- If a loss remains after netting capital gains and losses only 3,000$ of the net losses can be used to offset ordinary income
Sale of Personal Residence (section 121)
- 250k (single) and 500k (married FJ) of gain from sale is tax-free if lived in home for 2 out of the last 5 years
- Exception available if taxpayer lives in the residence less than two years and moves because of a new job, for health reasons, etc. receives prorated amount.
Recapture (1245 property)
When the sole proprietor purchases equipment and takes depreciation (cost recovery deduction - CRD), the CRDs offset the sole proprietor’s ordinary income. When the sole proprietor sells the equipment for a gain , the sole proprietor must:
- 1st look back and recapture the lesser of CRDs taken or gain realized as 1245 gain (ordinary income)
- 2nd - recover any excess gain as 1231 gain (capital gain)
Section 179 Qualifying vs. non-qualifying property
Qualifying:
tangible personal property
1245 property
Non-qualifying:
real estate
1250 property
intangible (owning a franchise)
AMT Preference Items (IPOD)
preference and adjustments (IPOD)
- Excess Intangible drilling costs (IDC)
- Private- activity muni bond
- Oil and gas percentage depletion / Excess intangible drilling costs (IDC)
- Depreciation (ACRS/MACRS) - but not straight line
AMT add back items
AMT Not deductible items
Add Back:
- incentive stock option bargain element
- Property and income taxes
Non-deductible
-Standard deduction
Postponing AMT
- Accelerating receipt of taxable income or differing the payment of property taxes, state income taxes, deductible medical expenses, or charitable giving, the regular tax (1040) may exceed the AMT payable (more taxable income)
- Deferring exercise of incentive stock options (preference items) to a later date
- or disqualifying the ISO so that it becomes NQSO (subject to ordinary income)
- Purchase public purpose muni bonds instead of private purpose bonds
